The New Arthurian Economics

Sunday, August 17, 2014

The net worth of the United States and its economic sectors has remained relatively consistent over time. The total net worth of the United States remained between 4.5 and 6 times GDP from 1960 until the 2000s...

The net worth of American households and non-profits constitutes three-quarters of total United States net worth - in 2008, 355% of GDP. Since 1960, US households have consistently held this position, followed by nonfinancial business (137% of GDP in 2008) and state and local governments (50% of GDP in 2008). The financial sector has hovered around zero net worth since 1960...

That last sentence there, this is the complete thought: The financial sector has hovered around zero net worth since 1960, reflecting its leverage... But the article has already defined net worth as assets less liabilities, so do we need the explanation embodied in those three extra words? Eh...

For me, the key bit of information is that the financial sector has approximately zero net worth.

One can see the central banker's mind at work. But I wonder, do they also have a "liabilities" folder?

... by Naohisa Hirakata and Nao Sudo of the Bank of Japan, and Kozo Ueda of Waseda University. From the abstract:

Our model, which is calibrated to the U.S. economy, highlights two features of the FIs’ [financial intermediaries] net worth. First, the relative size of FIs' net worth as compared to entrepreneurial net worth, namely, the net-worth distribution in the economy, is important for the financial accelerator effect. Second, a shock to the FIs' net worth has greater aggregate impact than that to entrepreneurial net worth. The key reason for these findings is the low net worth of FIs’ in the United States.

In other words, the low net worth of the financial sector magnifies the effect of a shock; and a shock to the financial sector has a greater impact than a shock to the productive sector.

From the conclusion of that paper:

Our results have policy implications regarding the intensified Basel bank regulations that have progressed after the financial crisis. In those regulatory frameworks, the FIs' net worth is expected to play the pivotal role in achieving the financial stability. Along this line, our results suggest that the regulatory framework that protects banks' net worth from irrational exuberance or that fosters accumulation of banks' net worth may be beneficial from the macroeconomic stability purpose.

Mmm. I don't like this. "Basel" is BIS, the Bank for International Settlements. It's a Friend of the Bank sort of thing. But why would we trust bankers to solve this problem? Did we learn nothing from the crisis?

Look what bankers want to do: They want to protect banks' net worth, and foster its accumulation.

I would rather solve the problem by having governments provide more money, and have each dollar of that money turned into fewer dollars of credit than is the case today. I want to reduce the reliance on credit, and increase reliance on the dollar.

I want to reduce the demand for credit and, in so doing, reduce the demand for a financial sector. If we do this, then boosting banks' net worth might help solve the problem. If we do not, then boosting banks' net worth only hastens the day when banks own everything and we are no longer fremen but coloni and slaves.